The worsening epidemiological situation and the lack of a new stimulus package suggest that the observed recovery in the third quarter is most likely of a short-term nature, thus by the end of the year consumer activity may significantly slow down.
In this context, it shouldn’t be a surprise that risk assets, including tech giants, have fallen sharply. Investors turn cautious as rising coronavirus infections increase the uncertainty. Even better than expected results from Alphabet, Amazon, Apple, and Facebook couldn’t turn the situation upside down. Overall, cyclicals have been hit hardest. Having said that, we have entered unchartered territory.
So far, for Q3 2020 (with 64% of the companies in the S&P 500 reporting actual results), 86% of S&P 500 companies have reported a positive EPS surprise and 81% have reported a positive revenue surprise. In Europe, on the other hand, 70% of Stoxx 600 companies have exceeded EPS estimates.
Talking about macroeconomic data, 3Q GDP increased by 12.7% in the euro area and by 12.1% in the EU, compared with the previous quarter. According to Eurostat, these were by far the sharpest increases observed since the time series started in 1995, and a rebound compared to the second quarter of 2020 when GDP had decreased by 11.8% in the euro area and by 11.4% in the EU. The Consumer Confidence in the euro area stood at negative 15.5 points in October, 1.6 points less from the figure recorded in September. Finally, the CPI remained negative in October for the third consecutive month (-0.3% per year) and core inflation at + 0.2%.
Meetings, on the other hand, didn’t bring any surprises. ECB left rates unchanged, as expected but the board showed a clear determination to recalibrate all monetary policy instruments to ensure that financing conditions remain favorable to support the economic recovery. In other words, more stimulus may come in December. The Reserve Bank of Australia, in turn, could cut the cash rate to 0.10% from 0.25% and set its yield curve control and bank funding facility at the same level, while reinforcing no tightening for three years.
Finally, despite the fact that the campaign is about to end, the tension in the market is not easing. Despite the fact that Biden is winning in the polls, the final results could be different. Biden beats Trump in key states – Pennsylvania, Florida, Arizona, Wisconsin – the states in which trump led in the 2016 election.